Posted: August 30th, 2015

Elasticity.

Consider a policy when the government is imposing a tax on the buyers (similar to the sales tax, but the tax amount is fixed).
a. Compare the changes in consumer surplus, producer surplus, government surplus, and the total surplus (deadweight loss) under Linear Demand (LD) and Constant Elasticity Demand (CED) scenarios.
b. Comment on the actual losses in various surplus measures under the different scenarios. Who benefits and who loses from the proposed policy?
c. Is it possible that the tax measure would still be implemented? Why?

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